Wednesday, June 14, 2017

Demand-side Economics and Supply-side Economics

Just as macroeconomics and microeconomics are taught separately at most universities, so too should demand-side economics and supply-side economics be taught separately.  Demand-side economics and supply-side economics are fundamentally different and require a program of coursework designed to explore each of these approaches in full, absent conflicting arguments and strategies.  Teaching the rudiments of each in one course is like teaching Spanish and French from the same textbook.  Without a suitable immersion into the efficacy of each approach, the student is left with a confusing array of theories and counter-theories.

Tax policy provides a good example of this concern.  Tax strategies for demand-side economics and for supply-side economics come from a unique starting position and are almost polar-opposites.  One favors top-down business investment strategies, and the other favors bottom-up consumer spending strategies.  On the supply-side, reducing inefficiencies and distortions in the market are of paramount importance.  Ensuring business has a ready supply of investment capital is an objective.  For supply-side economics, the market is king, and a low tax rate for movers and shakers is important. On the demand side, the consumer is king.  Aggregate demand for products and services drives the economy, and governmental infusion of money into the marketplace when growth lags is important.  Ensuring consumers have adequate discretionary income is critical.  For the demand-side approach, a sufficiently progressive tax code is a key component.

The end result of each strategy when set in motion will likely be distinct.  Without a deep dive into these outcomes we are left with nothing more than a bewildering array of counter-factual theories.  Academicians need to flush this out by examining competing theories in an untainted atmosphere of hard data.  This can only be done by examining the finer points of each strategy in a stand-alone, end-to-end analysis of these two distinct approaches to economic growth and sustainability.

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